In this article, Abeer Sharma pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses step-by-step guide to setting up a Limited Liability Partnership in India.
What is a Limited Liability Partnership?
When you try to formulate a business, the process doesn’t stop merely at conceptualizing the product or service and how you’re going to market it. You also have to spend some time figuring out how you want to set up the business structure. A clear idea of what business structure to adopt is important in order to know your rights and liabilities as a business owner, and to know what you as well as your clients, creditors, and investors can expect. A Limited Liability Partnership (LLP) is one of the standard options available to entrepreneurs to structure their business. LLPs are a relatively recent concept, having been officially recognized by Indian law with the passing of the Limited Liability Partnership Act, 2008. The first LLP – RK Handoo and Associates – was incorporated in the first week of April, 2009. An LLP can best be described as a “hybrid” business structure – something that incorporates elements of both partnerships and limited liability companies. The need for having LLPs in India was underscored by the fact that business owners needed some sort of protection from unlimited liability which was acting as a barrier to growth, while at the same time not desiring a subjection to the rigorous and expensive compliance procedures that defined the operation of corporations.
Some of the salient features of an LLP are:
- It has a separate legal entity from its owners (the partners). It can therefore sue and be sued in its own name, and can own property.
- The pecuniary liability of each partner is limited to the extent specified in the partnership agreement.
- There is no minimum capital requirement to start an LLP, unlike in the case of a corporation
- The minimum number of partners required for setting up an LLP is 2. However, there is no upper limit on the number of partners an LLP can have, unlike private limited companies or traditional partnerships, which do have upper limits on ownership.
- It is subject to more statutory compliances than traditional partnerships, but far less than private or public limited companies.
How can you set up a Limited Liability Partnership in India?
If you’re in the service industry, planning on setting up a risky new startup, or planning a business wherein different partners have different roles to play, choosing to incorporate as an LLP might be the wisest choice to make. The process to set up an LLP is extremely streamlined. It can be done entirely online within the span of a few business days. You also have no real need of the services of a chartered accountant or lawyer. Here are the steps required to form an LLP:
Have a business idea
This would be a necessary condition no matter which form of business structure you wish to adopt. You can’t really have a business without some sort of service or product in mind.
Find few partners
At least 2 partners are required in order to register an LLP. However, there is no maximum limit on the number of partners you can have. It is important to note, however, that at least one of these partners must be a resident of India.
Apply for Partners’ Director Identification Number (DIN)
Anyone who is a director of an incorporated entity is required by law to have a unique DIN. An LLP must have at least two Designated Partners to act as directors of the business, who are responsible for managing compliance under the LLP Act, though there is no upper limit. The DIN is mandatory as a kind of security to prevent fraud. Many times it was observed that directors of businesses would raise money from investors or the public and run away. The DIN, therefore, helps maintain a public register of directors and renders them traceable, in case they try to defraud someone and run away. The DIN can be applied for on the website of the Ministry of Corporate Affairs (www.mca.gov.in). It is a relatively straightforward process, requiring you to provide a few identification documents and fill out a few simple forms. Upon signing the forms (and uploading their scans) and payment of the registration fees of Rs. 100, you will be provided with your DIN.
Apply for a Digital Signature Certificate
To keep up with the changing times, which are driven by an increasing reliance on technological efficiency. When so many transactions take place in the digital sphere, it makes sense to make the verification process electronic, rather than insist on relying on old-fashioned methods. This is where Digital Signatures enter the picture. A Digital Signature Certificate (DSC) is an electronic proof of identity. It contains relevant personal details of the person whom it belongs to, providing a highly secure and confidential way of effecting online transactions and verifying one’s identity, and ensures that no document is tampered with after it has been signed. All Designated Partners of the LLP are required to have a DSC.
DSCs come under the jurisdiction of the Office of Controller of Certifying Authorities (CCA), which authorizes certain organizations known as Certifying Authorities to issue DSCs to end-users. These are the current Certifying Authorities licensed to give DSCs:
A Digital Signature Certificate can be applied for on their websites. It is a relatively simple and straightforward process, only needing a few identity and residence proof documents. There are three categories of DSCs: Class 1, Class 2, and Class 3. All classes have differing levels of security. Since Class 1 DSCs are only used for demo purposes, the designated partners of an LLP must apply for either a Class 2 or Class 3 certificate.
Obtain Name Approval
Every LLP must have a unique name under which it is registered and does its business. The name must not be trademarked by any other corporate entity nor sound so similar that it would reasonably confuse an unsuspecting outsider. There are also capital requirements in order to be able to use certain words in the firm name. For instance, in order to use the word “industries” in the firm’s name, the minimum paid-up capital must be Rs. 1 Crore. The complete list of naming guidelines can be found at the Ministry of Corporate Affairs’ website (specifically, at this URL: http://www.mca.gov.in/MCA21/dca/downloadeforms/Section20_21dec2009.pdf).
The Ministry of Corporate Affairs website also has an online tool by which one may check whether a particular name is available or not:
Once you’ve zeroed in on a particular acceptable name, you are required to fill out a form (called the Form 1) for registration of your LLP’s name, which can be done online on the mca.gov.in website.
Verification of Form 1
The Registrar of Companies then inspects Form 1. If there are any shortcomings, it will suggest some changes. And if everything is in order, it will then give its approval for the LLP to be incorporated.
Fill out the Incorporation Document and Subscription Statement
The incorporation document and subscription statement is known as Form 2 on the Ministry of Corporate Affairs website. The Form 2 is necessary for the government to officially recognize the partnership as a formal corporate entity. These documents will have to be signed by each designated partner and witnessed by an eligible professional (Usually a chartered accountant).
Granting of Certificate of Incorporation
After verifying Form 2 and being satisfied that all requirements have been complied with, the Registrar of Companies will send a Certificate of Incorporation – also known as Form 16 – in both physical and soft copies to the registered partners, together with An LLP Identification number. The LLP will be deemed to come into existence on the date that the Certificate of Incorporation is issued. The LLP will then be able to apply for PAN, TAN, Bank accounts, and any other tax or regulatory registrations or licenses that are required for the successful operation of the business.
Draft the LLP Agreement
The LLP Agreement is the contract that governs the very foundation of the partnership. It defines the rights and duties of the partners, their profit-sharing ratios, their relative capital contributions, the nature of the LLP’s business, the method of dispute settlement, and any other such provisions that may be necessary for the governance and functions of the LLP.
File the LLP Agreement
The partners have 30 days to file the Partnership Agreement with the Ministry of Corporate Affairs from the date of incorporation. In case this is not done, a fine will be levied. The LLP Agreement must be printed on stamp paper and signed by each Designated Partner together with the signatures of two witnesses. It shall be submitted to the Registrar of Companies in Form 3, which is provided online on the MCA website.
Wait for approval of Form 3
The government will inspect and verify Form 3. Once it’s satisfied that all the requirements have been complied with, it will grant its approval for the Limited Liability Partnership to commence business.
Start Earning Money
Congratulations. Your LLP is now successfully up and running. There are no more registration requirements or procedures required under the LLP Act.
As it can be deduced, setting up an LLP isn’t very complex or technical. Coming to whether or not one really needs the services of a lawyer or accountant to set an LLP, there is no right or wrong answer here. Generally, it’s possible for someone to do everything online by himself if he’s willing to take a few hours out to understand the procedure and technicalities involved. There might be need to hire a professional to draw up the LLP Agreement, for a poorly drafted agreement can be disastrous for one or all parties involved. But even for a partnership agreement, there exist plenty of good templates online which prospective partners can use if they’re confident in their basic legal knowledge and they don’t want to do anything unconventional.
The Limited Liability Partnership Act, 2008.
CS Meenal Abhyankar, Procedure of LLP (limited liability partnership) formation (Company Formation / Registration / Incorporation in India – a Blog by CS Meenal Abhyankar May 31, 2012), http://blog.abhyankarcs.com/company-formation-in-india/llp-limited-liability-partnership-formationregistration-procedure-in-india/.
Vishal Dhawan, What is a digital signature, Indian Express, indianexpress.com (The Indian Express Jun. 10, 2016), http://indianexpress.com/article/technology/tech-news-technology/digital-signature-electronic-documents-digital-signature-certificate-online-transactions-2844290/.
Controller of Certifying Authorities, Frequently asked questions, Ministry of Electronics and Information Technology, cca.gov.in, http://www.cca.gov.in/cca/?q=faq-page.
India Filings, LLP formation procedure in India (IndiaFilings.com | Learning Center Sept. 5, 2015), https://www.indiafilings.com/learn/llp-formation-procedure-india/.
Poddar Professional, Steps to form a LLP, http://www.poddarprofessional.com/llp-formation.php.